ISTANBUL BLOG: Elections could reshape Turkey's political landscape

By bne IntelliNewsJune 4, 2015

Kivanc Dundar in Istanbul -

Turkish voters will head to the polls on June 7 for parliamentary elections in an environment where the economy is slowing, unemployment and inflation rates are stubbornly high, and President Recep Tayyip Erdogan’s increasingly authoritarian behaviour is at the centre of public debate.

These elections could reshape Turkey’s political landscape, which has been dominated by Erdogan and his AKP party since 2002. Investors that supported the AKP in the past because of the party’s strong EU-orientation and market-friendly policies, this time round look worried about the outcome of the June 7 polls. Some local pollsters predict that support for the AKP is waning, and the party is probably losing votes to the nationalist MHP and the main Kurdish party HDP, leading to speculation that the AKP may not even secure enough seats in parliament to form a single-party government.

There is little doubt the AKP will win, but the key question is whether the ruling party will secure enough votes to give the party the constitutional majority to give Erdogan stronger presidential powers.

Erdogan defies the constitution

Erdogan, the founder of the AKP, is the most powerful, most controversial, and at the same time the most disliked political figure in Turkey’s modern history. The opposition parties and his critics say he must be tried for the 2013 corruption allegations - which Erdogan always denied and the AKP government covered up by sacking hundreds of police chiefs and prosecutors.

Erdogan is well aware that the June 7 elections will also seal his fate. That is why he is travelling around the country, using his popularity to rally support behind the AKP. Erdogan publicly says he wants the AKP to increase the number of seats it holds to 400 in the 500-seat parliament.

According to the constitution the president, must be neutral. But Erdogan simply defies all the rules. He has been touring the country, attending “inauguration ceremonies”, holding public rallies, appearing on TV interviews to bash the opposition parties, even rallying Turks in Europe, asking people to support the AKP in the coming elections so that the new parliament could pave the way for transforming Turkey to a presidential system which will bring him greater powers.

The country’s electoral commission (YSK) rejected appeals by the centre-left CHP and the HDP that Erdogan should be banned from holding public rallies. The commission’s rejection of the opposition parties’ complaints is yet another sign of Erdogan’s influence over state institutions.

Markets want another AKP government

Investment banks had been predicting another victory for the AKP – a scenario they believe would be welcomed by the markets – though they warned that the political noise could continue after the polls. There was a general consensus that a “very weak AKP” scenario was not likely to materialise. “For most of the political analysts and local investors, the scenario whereby the AKP gets the absolute majority but not the qualified majority to change the constitution is the most market friendly outcome,” said JP Morgan.

“In the run up to previous elections – the 2011 parliamentary elections, the 2014 local and then presidential elections – a market-positive outcome was one that best ensured the status quo in terms of the AKP’s dominance over the domestic political scene and the maintenance of its generally assured pro-market agenda,” said Timothy Ash at Standard Bank in a note on April 15. However, Ash added, the political scene in recent months has become much more complex, with the HDP set to run on a party basis in the June parliamentary elections, a move which could take seats from the ruling AKP, if the HDP passes the 10% threshold.

The composition of the next macroeconomic policy making team constitutes another source of political uncertainty, said J.P. Morgan in notes from its Turkey trip in April. Deputy PM Ali Babacan, the economy czar and one of the longest serving ministers in the successive AKP governments and a well-respected figure by international investors, is not running for parliament this time because of the AKP’s internal third-term rule. As AKP candidates were announced, the markets started to fear that people close to Erdogan could enter parliament on AKP ticket and assume top jobs at the economic management team.

“In case the HDP fails to get the 10%, then the AKP will be the main beneficiary and could get the 330 seats needed to change the constitution unilaterally. In this case, Turkey could switch to the presidential system that Erdogan has long been advocating. Given concerns over the checks and balances in the country, this result would be ill-received by the markets. This risk will increase if the popular support for the AKP falls towards the 40% mark”, said J.P. Morgan.

Nomura’s baseline scenario is that the AKP will gain the most votes by some margin, but not enough to immediately enact a constitutional referendum on the “presidential system” owing to the HDP entering the election as a party. Nomura sees the most notable market implications in the near term as possible pressure on the central bank to cut interest rates. Some fiscal slippage may also be a concern for the markets, and may be more likely this time with lower growth.

The mood among the market players changed in May as a public opinion survey from respected pollster Konda showed that support for the AKP was declining and HDP stood a higher chance of clearing the 10% threshold to enter parliament. Bekir Agirdir from Konda suggested that some of the Kurdish voters that supported the AKP in the past could vote for the HDP this time, mainly because of Erdogan’s hostile attitude towards the Kurds in Syria fighting against the Islamic State and Erdogan’s remarks denying “the Kurdish problem” in Turkey. Thus, the HDP, the election’s underdog, has become the key player.

“Assuming that the HDP crosses the 10% threshold for parliamentary representation, the AKP would need to secure at least around 43% of the votes to be able to form a single party government,” said Wolfgango Piccoli at TeneoIntelligence in a report on June 2. Regardless of the final result, Turkey’s political backdrop is set to become less predictable and stable than it has been since 2002, according to Piccoli. The bottom line is there no “sweet-spot” scenario as an increasingly authoritarian Erdogan will continue to control the country’s politics for the foreseeable future, resisting any attempt to limit his power if the outcome denies him the majority needed to amend the constitution, concluded Piccoli.

Challenging economic backdrop

The uncertainty over the parliamentary elections comes as the economic picture has darkened. Rapid implementation of key structural reforms is critical to restore confidence, warned the World Bank in its “Turkey Regular Economic Note” published on April 17. The World Bank cut its 2015 growth forecast for 2015 to 3% from a previous 3.5%. Under the assumption that domestic demand recovers sharply after the elections, as uncertainty is resolved, growth will accelerate in the second half of the year, but the carry-over from a weak start will keep the yearly pace of expansion to 3%, according to the World Bank.

“Compared with the 2007 and the 2011 general elections, the current macroeconomic backdrop seems to be considerably more challenging,” Ilker Domac and Gultekin Isiklar, Istanbul-based economists at Citigroup Inc., told the Wall Street Journal.

GDP growth slowed to 2.9% last year from 4.2% in 2013. The annual rate of inflation quickened to 8.09% in May from 7.91% in the previous month. According to the latest figures from the statistics office TUIK, the unemployment rate was 11.2% in February, or 3.2mn people. This is not a promising picture for a party which in the past built its electoral victory on the country’s economic success.

Constitutional majority or no majority?

Foreign banks’ election reports basically point to the heightened concerns among investors regarding the formalisation of the centralisation of powers, through a new constitution, in the hands of Erdogan, whose interference in government affairs have proved unsettling. The bottom line is that the general consensus predicts yet another electoral win for the AKP, but maybe this time the ruling party will not be able score a landslide victory.

"The critical level for the AKP is 43 %," said Ozgur Altug at BGC Partners in Istanbul in a report, cited by AFP.

TeneoIntelligence’s base case scenario is that the AKP will win 280-300 seats if the HDP succeeds in entering parliament, and around 310-325 seats if the HDP fails to clear the 10% threshold. The probability of a scenario in which the AKP fails to secure a simple majority of 276 seats and has to form a coalition government is increasing.

“The market is worried a coalition government may not make decisions in a timely manner, that conflicts between the parties may risk or end the coalition, and stability may be damaged,” Bloomberg quoted Pinar Uslu, a strategist at Istanbul-based ING Bank AS, as saying on June 1.

But, the authors of a report by Renaissance Capital on May 28 said that a coalition would not worry them. “Unlike in the 1990s, when fragmented and ideologically incompatible coalitions were destined to fail economically unless they reformed, today we think Turkey’s economy has matured enough to tolerate a coalition, especially one that has the greater focus of being led by a dominant party, vs the highly fragmented coalitions of the 1990s,” they said. “The AKP is warning again of the risks to Turkey of a coalition, but we see this as pre-election rhetoric. If Turkey is not ready for a coalition, then the AKP has effectively not done enough in the past 13 years to move the country beyond the structural vulnerabilities of the 1990s,” said the authors of the report.

It is difficult to make accurate predictions about the outcome of the elections and parliamentary arithmetic. However, the main opposition party CHP calculates the number of seats the competing parties could get under different scenarios. If the AKP garners the vote in the upcoming elections it received in the 2014 local polls (43.4%), and the HDP passes the threshold, the AKP will have 271 seats in parliament, still short of seats for forming a single-party government, according to CHP’s calculations (scenario-2). But if it gets the 43% of the votes, and the HDP fails to enter parliament, the AKP will be able to form a single-party government (scenario-3).

The opposition parties CHP, MHP and HDP have already declared that they would not form a coalition government with the AKP or would support a minority AKP government from the opposition benches.

A minority government of CHP-MHP supported by the HDP or a minority government of CHP-HDP supported by the MHP is not likely because of the ideological differences between the Kurdish party HDP and nationalist MHP.

Murat Yektin, one of Turkey’s most respected political commentators, outlines on June 3 two possible early elections scenarios.

Scenario 1: The HDP gets into parliament and the CHP and the MHP increase their votes, by by not enough to push the AKP below 276 seats.

“This scenario would make Erdogan angry, because the opposition parties would feel better than before and none would be likely to bargain with the AKP to pave the way for Erdoğan’s super-presidency. Erdogan, could pressure a weakened [Prime Minister Ahmet] Davutoglu to call for early elections in order to achieve his goal within his five-year presidential term. This is very likely to cause a row within the AKP, perhaps reaching a peak in a congress in September. In this scenario, Davutoğlu may not be in a position to resist much.”

Scenario 2: The HDP gets into parliament and the CHP and the MHP increase their votes enough to push the AKP below 276 seats.

“In this case it would be very difficult for the AKP to find a coalition partner that would agree on Erdogan’s presidential model, but the opposition parties would not want to form a fragmented coalition government against a strong AKP opposition. In either case, Erdogan would push Davutoglu to call an early election, which Davutoglu might also like to hold.”

According to Turkey’s laws, if a new council of ministers cannot be formed within 45 days or the new council of ministers fails to receive a vote of confidence, the president, in consultation with the speaker of the Assembly, may call for new elections. In this case, votes will be cast on the first Sunday following the 90th day after the decision of the president.

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